Loss on writing-off of irrecoverable advances under scheme of amalgamation cannot be carried forward for set off in subsequent years

CA Sandeep Kanoi

Facts of the case – Appellant is a company carrying on business of manufacturing of transformers, switch gears, electrical products, home appliances, etc.. It also has an engineering and project division. The Appellant filed the returns of income for the Assessment  Year 2002-­2003 declaring the total income under normal provisions as  well as under Section 115JB of the Income Tax Act, 1961 at Rs.NIL.  During the previous year relevant to the Assessment Year 2002­-2003,

The  Appellant claimed a capital loss of Rs. 34,52,77,992/­ and required the  same to be carried forward for set off in subsequent years. The Appellant  was to receive amounts of Rs.17,87,31,508/­ and Rs.17,25,46,484/­ from  M/s Bharat Starch Industries Limited and M/s JCT Limited, respectively.  The Appellant received only shares worth of Rs. 60,00,000/­ from M/s  Bharat Starch Industries Limited towards dues. The wrote off balance of  Rs. 34,52,77,992/­ was claimed as a capital loss. The write off was in the  course of schemes of arrangement which were subsequently sanctioned by  the Gujarat and Punjab and Haryana High Courts, respectively. The  Respondent rejected the claim by holding that in order to be eligible to  carry forward of the capital loss, there should be a capital asset as defined  in Section 2(14) and the same should be transferred in the manner as  defined in Section 2(47) of the Income Tax Act, 1961. Since the deposits  or advances given to M/s JCT Limited and M/s Bharat Starch Industries  Limited and written off, are not capital assets nor there was any transfer,  no capital loss is allowed to be carried forward to the subsequent year. That is how the Assessing Officer passed the order of assessment dated  29th  March, 2005.

Held – Deposits or advances given to the parties which was written-off latter in the scheme of amalgamation, were neither a capital assets nor there was any transfer, thus no capital loss is allowed to be carried forward to the subsequent year. Thus held that irrecoverable advances written-off are not a transfer and the loss cannot be claimed as capital loss.